High-Yield Bond Worry Gauges on the Rise

By Brendan Conway

The CBOE Volatility Index, or “VIX,” is sleepwalking. The same isn’t true for high yield bonds’ own worry signal.

The so-called implied volatility of options to buy and sell the two biggest high-yield bond exchange-traded funds are markedly higher in recent weeks.

Specifically, these readings are more than 60% higher over the last month for the iShares iBoxx $ High Yield Corporate Bond Fund (HYG) and the SPDR Barclays Capital High Yield Bond ETF (JNK), ConvergEx strategist Nicholas Colas writes this morning. “That would be like the VIX moving to 24, instead of its current reading of 15,” he writes.

And yet high-yield bonds ultimately move much like stocks, swinging hard and fast in a selloff and rising quickly when sentiment is strong. Is the VIX right, or are bond ETF option traders?

Colas says the bond bears are correct but early:

My inclination is to think that options players may well be right on this call, but they are also early. Just as with publically held companies, high yield issuers have done yeoman’s work in the past four years improving their cost structures. Any downturn in economic growth – as a result of a badly handled Fiscal Cliff or simply the next slowdown for the U.S. economy – will filter through highly levered balance sheets and hurt the value of these bonds. But to place that bet right now seems premature. The hunt for yield is an overarching theme of the last few years, and barring a truly epic meltdown, investors will be looking for opportunities in high yield as we enter 2013.

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As exchange-traded funds and other investing vehicles have ballooned in number, the task of figuring out what works well and what doesn’t has only gotten harder. Barrons.com’s Focus on Funds looks under the hood of ETFs, mutual funds and hedge funds for overlooked values, actionable ideas and the latest pitfalls for fund investors.

Chris Dieterich has covered the U.S. stock market for The Wall Street Journal and Dow Jones Newswires. He is a graduate of Regis University and the Missouri School of Journalism.